What we still don't know on BofA's foreclosuresNovember 2, 2010: 1:17 PM ET
We are in the early innings yet of the foreclosure mess.
It's been a month since Bank of America (BAC) announced a timely foreclosure review that would "give customers confidence they are being treated fairly." But many questions remain unanswered in what's looking like a drawn out and costly affair.
BofA, the nation's biggest bank, halted foreclosure sales in 23 states Oct. 1 and then expanded the ban nationwide a week later. The freeze remains in place and the bank continues to review its practices, Bank of America Home Loans spokesman Rick Simon said Friday.
The bank has said it is reviewing both its procedures and individual cases, and has conceded that it has changed some processes in response.
But there is a lot that Bank of America has not disclosed: It hasn't explained what changes it made. It has been vague about how many foreclosure files it has actually checked, how many and what sorts of mistakes it has found, and how long it might take to complete the process. It hasn't even addressed whether foreclosures thus far have been valid under the law.
The details matter because Bank of America's reach is so large. At midyear it was in the process of foreclosing on $19 billion of its own mortgages and $88 billion worth of mortgages it services for others, according to SNL Financial.
At least three times over the past month, Bank of America has said in public statements that "the basis for our foreclosure decisions is accurate."
Simon says that assertion is based on a review of financial details, such as borrowers' indebtedness and payment histories. Bank of America emphasizes that borrowers who are current on their loans aren't getting thrown out on their ear: By its count a third of foreclosed properties sold in the third quarter were vacant, and their owners were on average behind on payments by 18 months.
But even if Bank of America has been foreclosing only on late borrowers after appropriate loan-modification attempts, critics say, its statements have simply ignored the most important question.
"They may have been accurate in that the borrower was delinquent," said Rebel Cole, a finance and real estate professor* at DePaul University in Chicago. "But what they don't say is, 'We have followed the law,' and that is where the issue is."
Cole says the banks lack the required paperwork to proceed with foreclosures in many cases. They can restore documentation that has been lost or destroyed, but doing so isn't cheap, potentially running into the tens of thousands of dollars for a single home that may in some instances not be worth much more than that.
"The genie's out of the bottle on this one," Cole says.
A letter last month from Ohio Attorney General Richard Cordray asserts that Bank of America cut corners in what "would appear to amount to a fraud upon our courts." Skeptics say the banks' apparent failure to heed state property law could become an albatross for Bank of America and its big rivals in the sagging U.S. mortgage market, JPMorgan Chase (JPM) and Wells Fargo (WFC).
"The banks are trying to paper over this problem, but if you know the law, you know there is no easy way out of this," said Cole.
Not everyone buys the idea that the foreclosure mess spells doom for the banks, which potentially face much bigger problems with a still-sick housing market and a weak economic recovery.
"In the scheme of things, this is not going to matter," said Chris Whalen of Institutional Risk Analytics. "We'll see some bizarre trial decisions and the cost of servicing is going up, but this is not going to kill them."
Bank of America conceded in a statement last month that "we're not claiming perfection," which is just as well given the wrongful foreclosure stories that have come to light recently. Bank of America emphasizes that it is "committed to getting our process right."
In the meantime, the bank maintains it is still gearing up to resume foreclosures – though its recent statements have been more measured.
On Oct. 18, Bank of America said in a statement that it anticipated that "the first foreclosure affidavits will be resubmitted to the courts" by Oct. 25. More recently, though, it said it is "preparing to submit affidavits" in a process that "will take several weeks."
*Update: I initially botched Cole's title, mistakenly calling him a law professor. My apologies to him and moreover to the publicity-seeking administrators at DePaul.